Prudential 2012 Annual Report Download - page 156

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
12. CLOSED BLOCK (continued)
The policies included in the Closed Block are specified individual life insurance policies and individual annuity contracts that were in
force on the effective date of the Plan of Reorganization and for which Prudential Insurance is currently paying or expects to pay
experience-based policy dividends. Assets have been allocated to the Closed Block in an amount that has been determined to produce cash
flows which, together with revenues from policies included in the Closed Block, are expected to be sufficient to support obligations and
liabilities relating to these policies, including provision for payment of benefits, certain expenses, and taxes and to provide for continuation
of the policyholder dividend scales in effect in 2000, assuming experience underlying such scales continues. To the extent that, over time,
cash flows from the assets allocated to the Closed Block and claims and other experience related to the Closed Block are, in the aggregate,
more or less favorable than what was assumed when the Closed Block was established, total dividends paid to Closed Block policyholders
may be greater than or less than the total dividends that would have been paid to these policyholders if the policyholder dividend scales in
effect in 2000 had been continued. Any cash flows in excess of amounts assumed will be available for distribution over time to Closed
Block policyholders and will not be available to stockholders. If the Closed Block has insufficient funds to make guaranteed policy benefit
payments, such payments will be made from assets outside of the Closed Block. The Closed Block will continue in effect as long as any
policy in the Closed Block remains in force unless, with the consent of the New Jersey insurance regulator, it is terminated earlier.
The excess of Closed Block Liabilities over Closed Block Assets at the date of the demutualization (adjusted to eliminate the impact
of related amounts in AOCI) represented the estimated maximum future earnings at that date from the Closed Block expected to result from
operations attributed to the Closed Block after income taxes. In establishing the Closed Block, the Company developed an actuarial
calculation of the timing of such maximum future earnings. If actual cumulative earnings of the Closed Block from inception through the
end of any given period are greater than the expected cumulative earnings, only the expected earnings will be recognized in income. Any
excess of actual cumulative earnings over expected cumulative earnings will represent undistributed accumulated earnings attributable to
policyholders, which are recorded as a policyholder dividend obligation. The policyholder dividend obligation represents amounts to be
paid to Closed Block policyholders as an additional policyholder dividend unless otherwise offset by future Closed Block performance that
is less favorable than originally expected. If the actual cumulative earnings of the Closed Block from its inception through the end of any
given period are less than the expected cumulative earnings of the Closed Block, the Company will recognize only the actual earnings in
income. However, the Company may reduce policyholder dividend scales, which would be intended to increase future actual earnings until
the actual cumulative earnings equaled the expected cumulative earnings.
As of December 31, 2012 and 2011, the Company recognized a policyholder dividend obligation of $885 million and $762 million,
respectively, to Closed Block policyholders for the excess of actual cumulative earnings over the expected cumulative earnings.
Additionally, accumulated net unrealized investment gains that have arisen subsequent to the establishment of the Closed Block have been
reflected as a policyholder dividend obligation of $5,478 million and $3,847 million at December 31, 2012 and 2011, respectively, to be
paid to Closed Block policyholders unless offset by future experience, with an offsetting amount reported in AOCI. See the table below for
changes in the components of the policyholder dividend obligation for the years ended December 31, 2012 and 2011.
On December 11, 2012, December 13, 2011 and December 14, 2010, Prudential Insurance’s Board of Directors approved a
continuation of the Closed Block dividend scales in 2013, 2012 and 2011, respectively.
Closed Block Liabilities and Assets designated to the Closed Block at December 31, as well as maximum future earnings to be
recognized from Closed Block Liabilities and Closed Block Assets, are as follows:
2012 2011
(in millions)
Closed Block Liabilities
Future policy benefits ......................................................................... $50,839 $51,423
Policyholders’ dividends payable ................................................................ 887 902
Policyholders’ dividend obligation ............................................................... 6,363 4,609
Policyholders’ account balances ................................................................. 5,426 5,484
Other Closed Block liabilities ................................................................... 3,366 4,031
Total Closed Block Liabilities ............................................................... 66,881 66,449
Closed Block Assets
Fixed maturities, available-for-sale, at fair value ..................................................... 41,980 42,024
Other trading account assets, at fair value .......................................................... 224 269
Equity securities, available-for-sale, at fair value .................................................... 3,225 3,122
Commercial mortgage and other loans ............................................................ 8,747 8,322
Policy loans ................................................................................. 5,120 5,296
Other long-term investments .................................................................... 2,094 2,080
Short-term investments ........................................................................ 1,194 485
Total investments ......................................................................... 62,584 61,598
Cash and cash equivalents ...................................................................... 511 1,006
Accrued investment income ..................................................................... 550 571
Other Closed Block assets ...................................................................... 262 284
Total Closed Block Assets .................................................................. 63,907 63,459
Excess of reported Closed Block Liabilities over Closed Block Assets ....................................... 2,974 2,990
Portion of above representing accumulated other comprehensive income:
Net unrealized investment gains (losses) ....................................................... 5,467 3,836
Allocated to policyholder dividend obligation ................................................... (5,478) (3,847)
Future earnings to be recognized from Closed Block Assets and Closed Block Liabilities ........................ $ 2,963 $ 2,979
154 Prudential Financial, Inc. 2012 Annual Report